Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What happens to the demand for a substitute good when the price of another good decreases?

1. The demand for the substitute good increases

2. The demand for the substitute good decreases

3. The demand remains unchanged

4. Demand fluctuates without a clear trend

The correct answer is: The demand for the substitute good decreases

When the price of one good decreases, the demand for its substitute typically decreases as well. This is rooted in the law of demand and the relationship between substitute goods, which are products that can be used in place of one another. To illustrate, if the price of a product such as butter drops significantly, consumers are likely to buy more butter instead of margarine, its substitute. As butter becomes more affordable, the quantity demanded for butter increases, which in turn drives down the demand for margarine because fewer people will feel the need to purchase it at a higher price. Thus, as consumers shift their preference toward the cheaper option, the demand for the substitute good reacts negatively, leading to a decrease in demand. This interplay between the price of one good and the demand for substitutes is a fundamental principle in economics that highlights consumer choice based on price sensitivity.